1. Introduction: One of the major important changes proposed in the recently concluded 47th GST Council Meet held on 28 & 29th June 2022 was that the section 110 of the Finance Act, 2022 to be notified by Central Government at the earliest. The said section relates to retrospective amendment in section 50(3) of CGST Act, with effect from 01.07.2017, to provide that interest will be payable on the wrongly availed ITC only when the same is utilized; This is one of the most awaited changes under GST. Further, interest on late payment of tax is also charged @ 18% on net tax liability in terms of proviso to sec 50(1) of the CGST Act 2017. However, the above proposed changes are restricted to certain specified cases only. In order to understand the same, let us have a recap of interest liability under GST.
2. Interest on late payment of tax.
As per sec 50(1) of the CGST Act 2017, a taxpayer is liable to pay interest @ 18% p.a. on the late payment of tax or non-payment of Tax. The extract of the said section has been provided below.
“Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council:
Further, 1st proviso to sec 50(1) of the CGST Act, 2017 prescribes that interest is to be paid only on the amount of tax which is to be paid through e-cash ledger. In other words, it can be said that if there is sufficient amount of input tax credit (ITC) available in the e-credit ledger & nothing is required to be paid through e-cash ledger then interest is not required to be paid.
However, it is to be noted that this proviso is applicable only for delay filing of return. In other words, it is not applicable if liability pertaining to an invoice of a particular return period (say, May 2022) is reported in the next or any other return period (say, June 2022). In this case, interest shall be payable on the gross output liability only not on the net tax liability.
The said proviso has been extracted below
“Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger.”
Reason behind insertion of the proviso: – Insertion of the proviso mentioned supra was a big relief to the taxpayers as the department was demanding interest on the gross tax liability in the early phases of GST even when ITC was fully available. This was causing hardships for the taxpayers as he would have paid the entire tax liability by simply utilizing the ITC available to him. For delay filing of return a taxpayer was liable to pay fees as per sec 47 of the CGST Act 2017 (currently Rs. 25 under CGST & SGST each) i.e. for mere delay filing of return, he was being penalized twice in the form of both late fees as well as interest on gross tax liability.
Hence, on account of various representations made before the concerned authorities, the above mentioned proviso was inserted. It may be noted in this regard that interest is compensatory in nature and therefore it may be imposed only when there is a loss to the counter party. Hence, it is very logical to charge interest only on NET GST liability as in spite of fact that the Govt. was not losing any revenue; taxpayer was being penalized for it.
Implication of the proviso: – First of all, attention is being drawn on the phrase “supplies made during a tax period and declared in the return for the said period furnished after the due date”. The instant phrase clearly depicts that the said proviso is applicable only in respect of delay filing of return. In all other cases of late payment of tax, the proviso will not be applicable and hence interest would be computed on the entire output tax liability & not on the net tax liability. This may be well understood with the help of the following example.
| GSTR 3B Return for the period May, 2022 | |||
| Situation 1 | Situation 2 | Situation 3 | |
| Due date | 20th June, 22 | 20th June, 22 | 20th June, 22 |
| Actual Date of filing. | 25th June 22 | 25th June 22 | 20th June 22 |
| Delay (days) | 5 | 5 | – |
| Output tax liability for May’22 (A) | 10,000 | 10,000 | 10,000 |
| Output tax liability reported in GSTR 3B. (B) | 10,000 | 10,000 | 9,000 |
| Input tax credit available (C) | 12,000 | 8,000 | 12,000 |
| Net tax liability (B-C) | – | 2,000 | – |
| Amount not reported (A-B) | – | – | 1,000 |
| Interest | NA | 4.93
(2,000*18%*5/365) |
14.79 * (1,000*18%*30/365)# |
# Assuming Rs. 1,000/- was reported in GSTR 3B of June ’22, filed on 20th July 2022, delay = 30 days. * To be paid at the time of filing GSTR 3B for the month of June 2022.
As shown in the above example, if in this case one invoice having tax liability of Rs. 1,000, pertaining to the current return period (May 2022) was left to be reported and it is reported in the return filed for the month of June 2022, then interest shall be calculated on the gross tax liability i.e. without setting off ITC available. This is because if interest is allowed to be calculated on the net tax liability in all cases, taxpayers may resort to unwarranted ways. For example, a taxpayer may start to show intentionally only that much of output tax liability in GSTR 3B to which ITC is available in his e-credit ledger. Reporting and payment of tax on the remaining invoices could be deferred till the period the taxpayer has sufficient ITC so that the tax on the same could be paid through e credit ledger. The same has been illustrated below.
Hence, in order to discourage such unfair means of deferment of tax, the benefit of paying interest on net tax liability has been made applicable only for delay filing of return.
Conclusion: – Hence, while filing GSTR 3B of a particular period it is to be ensured that the return takes into account all the liabilities pertaining to the said period. Any liability missed to be reported and paid will attract interest on the gross amount.
3. Interest on Excess ITC claimed.
Earlier, sec 50(3) of the CGST Act 2017 was providing interest @ not exceeding 24% on undue or excess claim of input tax credit u/s 42(10) and undue or excess reduction in output tax liability u/s 42(10). However, it has been done away with.
Clause 110 of the Finance Act 2022 seeks to retrospectively substitute section 50(3) of the CGST Act 2017 so as to provide for levy of interest @ 18% on ITC wrongly availed and utilised. The said clause has been reproduced hereunder.
“Clause 110 seeks to substitute a new sub-section for sub-section (3) of section 50 of the Central Goods and Services Tax Act so as to provide for levy of interest on input tax credit wrongly availed and utilised, and to provide by rules the manner of calculation of interest in such cases.”
It may be noted that the instant clause has not been notified yet. However, once section 110 is brought into force, section 50(3) of the CGST Act would stand amended retrospectively from 01.07.2017. Hence, a view may always be taken that even if it is not notified still it will come to rescue the taxpayer.
Reason behind substituting existing 50(3): – As mentioned earlier that interest is compensatory in nature. Mere availment of Input tax credit is just a book entry and there is no actual loss of revenue to the Government until the same gets utilized by the taxpayer against the output tax liability; only when the ineligible credit is utilized towards payment of tax, there is a loss to Government. Hence, imposition of interest on mere availment of ITC was a hardship for the taxpayers. Hence, by retrospectively substituting the existing sec 50(3), the Government provided much awaited relief to the taxpayers.
Implication of the word ‘availed and utilised’: The addition of word ‘availed and utilised’ means that no interest would be payable on ITC wrongly claimed but not utilized. Taxpayers who inadvertently make any excess claim of ITC in their Form GSTR 3B may voluntarily reverse the same in the subsequent tax periods without any interest payment if the ITC in question has not been utilised.
Conclusion: – Interest at the rate of 18% would be payable only if the ITC availed has been fully or partly utilized. However, the Department may seek to levy a general penalty for such inadvertent availment of ITC under sec 125 of the CGTS Act 2017. Further, it has been stipulated that rules & the manner of calculation of interest in such cases shall be provided.
4. Refund of excess interest paid: Proviso to sec 50(1) of the CGST Act, 2017 has retrospective effect as it has been made applicable with effect from the 1st day of July, 2017. Hence, question arises what if a taxpayer has already paid interest on gross tax liability in terms of existing provisions of law.
Further, with respect to the proposed reduction in the rate of interest to 18% from 01.07.2017, question may arise as to whether taxpayers who had already deposited 24% interest on wrongful credit availments become eligible to refund of the amount of interest paid. Furthermore, even when ITC has been utilised, would differential interest @ 6% be eligible to be refunded.
In this regard, taxpayers can explore the possibility of seeking refund of differential interest of 6% or the interest already paid in terms of existing provisions of law. However, litigation cannot be ruled out in such matters.
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